Financial and Investment Management

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Financial and Investment Management Financial and Investment Management M.Com.Degree Second Year Paper No. VII School of Distance Education Bharathiar University, Coimbatore - 641 046 Author: Sudhindra Bhat Copyright © 2008, Bharathiar University All Rights Reserved Produced and Printed by EXCEL BOOKS PRIVATE LIMITED A-45, Naraina, Phase-I, New Delhi-110028 for SCHOOL OF DISTANCE EDUCATION Bharathiar University Coimbatore-641046 CONTENTS Page No. UNIT I Lesson 1 Introduction to Investment Management 7 Lesson 2 Financial Markets 43 UNIT II Lesson 3 Fundamental Analysis 83 Lesson 4 Technical Analysis 123 Lesson 5 Security Evaluation 174 Lesson 6 Portfolio Analysis and Management 219 UNIT III Lesson 7 Merchant Banking 243 Lesson 8 Lease Financing 250 Lesson 9 Hire Purchase 264 UNIT IV Lesson 10 Mutual Fund 277 Lesson 11 Financial Institutions in India – UTI, LIC 318 Lesson 12 SBI and Other Commercial Banks 329 UNIT V Lesson 13 Credit Rating 345 Lesson 14 Venture Capital 369 Model Question Paper 413 FINANCIAL AND INVESTMENT MANAGEMENT SYLLABUS UNIT I Nature, Meaning, Scope and Features of Investment Management - Investment Media - Investment Process - Risk and Return - Financial Markets. Capital Market - New Issue Market - Stock Exchange - SEBI & its Regulations - NSE - OTCEI - Recent Trends. UNIT II Fundamental and Technical Analysis and Security Evaluation - Economic, Industrial, Company and Technical Analysis - Portfolio analysis and Management - Scope - Markowitz Theory - Portfolio Selection and Types of Portfolio - Diversification. UNIT III Merchant Banking - Meaning, Evaluation - Scope of Merchant Banking - Organization and Pattern of Management - Role of Merchant Banker - Lease Financing - Types of Lease - Factors Influencing Lease - Evaluation of Leasing - Hire Purchase - Meaning, Growth of Hire Purchase in India - RBI Guidelines - Source of Finance. UNIT IV Mutual Fund - Concept and Origin of Mutual Fund - Growth of Mutual Fund in India - Mutual Fund Schemes - Money Market Mutual Fund - UTI - LIC - SBI and other commercial banks - Entry of Private Financing Companies in Mutual fund schemes. UNIT V Credit Rating - Objectives - Institutions engaged in credit rating - Purpose and proce- dure of rating for debentures - Fixed Deposits - Short-term instruments. Role of CRISIL and ICRA. Venture Capital - Difference between Venture Capital and Conventional Funding - Venture capital schemes - Legal aspects - Agencies involved in providing venture capital. UNIT I LESSON 1 INTRODUCTION TO INVESTMENT MANAGEMENT CONTENTS 1.0 Aims and Objectives 1.1 Introduction 1.2 Meaning of Investment 1.3 Nature and Scope of Investment 1.4 Features of Investment Management 1.5 Investment Media 1.6 Investment Process 1.7 Risk and Return 1.7.1 Definitions and Concepts of Risk 1.7.2 Types of Investment Risk 1.7.3 Risk and Expected Return 1.8 Let us Sum up 1.9 Lesson End Activity 1.10 Keywords 1.11 Questions for Discussion 1.12 Suggested Readings 1.0 AIMS AND OBJECTIVES After studying this lesson, you should be able to: l Understand the nature, meaning, scope and features of investment management l Attempt on the concept of investment media and investment process l Analyse the factors of risk and return 1.1 INTRODUCTION Investment involves making of a sacrifice in the present with the hope of deriving future benefits. Investment has many meanings and facets. Two most important features of an investment are current sacrifice and future benefit. We can identify a variety of activities which display the two features of investment. For example, A Portfolio manager buys 10,000 shares of ITC Ltd for his mutual fund; your relative may have subscribed to the 6-year Post Office Monthly Income Scheme. A corporate firm may spend Rs. 5 crores for expansion programmers; a middle aged man with a family decides to spend Rs. 10 lakhs to buy an apartment in a city and so on. All these constitute investment activities because they involve current sacrifice of consumption and hope of future gain. Perhaps, 8 an investment in an apartment for the purpose of living in it may involve, partially at least Financial and Investment Management certain, current consumption but because the family will continue to live in the house for a very long period of time, the act of purchasing a house or apartment may be taken as an investment activity. 1.2 MEANING OF INVESTMENT We can now give a simple yet a broad definition of investment. We can define investment as “Postponed Consumption”. When you postpone consumption, sacrifice takes place in the present and is certain whereas the benefits occur in future and are uncertain. Therefore, Risk and Expected return from the investment are the two key determinants of Investment process. At this point, it is necessary to distinguish between certain activities which are in the nature of gambling and those which are genuine investments. For instance, if you buy Rs. 1000 worth of lottery ticket you may be sacrificing current consumption in the hope of winning a handsome return but you are not really investing. In gambling or change games, winning involves a lot of luck and the outcome as largely very uncertain. A buyer of lottery tickets knows that he will lose the money spent if he does not win and that the act of winning is not in his hands. However, an investor, not being a speculator, does not proceed with the assumption that he would lose his money because the act of investment decision-making is a well-thought out process. Genuine investors would always have an appropriate information. In relative to the risk profile of the investor, and thereafter the actual investment avenue is selected. However, in real life, it is very difficult to draw a very clear demarcating line to separate speculative or gambling motives from the genuine investment motives and the differences purely a matter of opinion. 1.3 NATURE AND SCOPE OF INVESTMENT Investment refers to a commitment of funds to one or more assets that will be held over some future time period. Almost all individuals have wealth of some kind, ranging from the value of their services in the workplace to tangible assets to monetary assets. Anything not consumed today and saved for future use can be considered an investment. For our purposes, investment will mean a measurable asset retained in order to increase one’s personal wealth. We invest to improve our future welfare. Funds to be invested come from assets already owned, borrowed money, and savings or foregone consumption. By foregoing consumption today and investing the savings, we expect to enhance our future consumption possibilities. Anticipated future consumption may be by other family members, such as education funds for children or by ourselves, possibly in retirement when we are less able to work and produce for our daily needs. Regardless of why we invest we should all seek to manage our wealth effectively, obtaining the most from it. This includes protecting our assets from inflation, taxes and other factors. 1.4 FEATURES OF INVESTMENT MANAGEMENT If we are making investment decisions today that will directly affect our future wealth, it would make sense that we utilize a plan to help guide our decisions. Surprisingly, the majority of people do not have in place any type of formalized investment plan. Taking some time to put together a financial plan can reap tremendous benefits. First, let’s define financial planning. Financial planning is the process of meeting our life goals through the proper management 9 Introduction to Investment of our finances. Life goals can include buying a home, saving for our child’s education or Management planning for retirement. Financial planning provides direction and meaning to our financial decisions. It allows us to understand how each financial decision we make affects other areas of our finances. For example, buying a particular investment product might help us to pay off our mortgage faster or it might delay our retirement significantly. By viewing each financial decision as part of a whole, we can consider its short and long-term effects on our life goals. We can also adapt more easily to life changes and feel more secure that our goals are on track. 1.5 INVESTMENT MEDIA The financial planning process consists of six steps that help us to take a “big picture” look at where we are financially. Using these six steps, we can work out where we are now, what we may need in the future and what we must do to reach our goals. These six steps are: 1. The financial planner should clearly explain or document the services to be provided to you and define both his and your responsibilities. The planner should explain fully how he will be paid and by whom. You and the planner should agree on how long the professional relationship should last and on how decisions will be made. 2. The financial planner should ask for information about your financial situation. You and the planner should mutually define your personal and financial goals, understand your time frame for results and discuss, if relevant, how you feel about risk. The financial planner should gather all the necessary documents before giving you the advice you need. 3. The financial planner should analyze your information to assess your current situation and determine what you must do to meet your goals. Depending on what services you have asked for, this could include analyzing your assets, liabilities and cash flow, current insurance coverage, investments or tax strategies. 4. The financial planner should offer financial planning recommendations that address your goals, based on the information you provide. The planner should go over the recommendations with you to help you understand them so that you can make informed decisions. The planner should also listen to your concerns and revise the recommendations as appropriate. 5. We and the planner should agree on how the recommendations will be carried out.
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